Poll:At what discount rate would you buy SPIA?

[Car-Guy]

Quote:

Originally Posted by MBMiner You're not going to get intelligent replies to this poll because most people don't understand present value concepts.

Most people may not understand the concepts (I really don't know) but I would "expect" most of the people that frequently read or post on this forum do understand the present value concepts. It's pretty basic stuff if you are investing.

[sengsational]

Quote:

Originally Posted by karluk How would you feel about 4% for an annuity with, say, a two year term?

Maybe I misunderstood. I thought we were talking about a life annuity. If the instrument has a fixed term, then I might not call it an SPIA...I'd call it a CD.

[karluk]

Quote:

Originally Posted by longinvest I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

Saying "never" to an annuity, regardless of terms, is quite a hazardous undertaking, indeed. It invites questions about just how seriously you would adhere to your intention, as the terms of the annuity get sweeter and sweeter.

For example, would you turn down an annuity that allowed you to invest $100k and receive $100k per month for the rest of your life? What sort of future inflation is so dangerous that would make such terms something you would turn down?

Think that's not realistic? It's easy to come up with real life examples of annuity-like products with just as attractive terms, or even better. An example is a winning lottery ticket that was purchased for $2 and offers, say, 20 million dollars per year payouts for the next 20 years. You may turn this down as unlikely to keep up with inflation over the next 20 years, but I suspect most people would be willing to take the risk.

My expectation is, if people really considered all of the angles, there is generally an interest rate that is attractive enough to tempt them to annuitize some of their nest egg. OP's poll is trying to narrow down a little just where that tipping point is.

[Gill]

Quote:

Originally Posted by longinvest I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet.

Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound?
Bruce

[gauss]

Has anyone done the calculation on what the equivalent discount rate is implied in delaying drawing SS until age 70?

Are you assuming that all costs are included by the discount rate?

I like the concept of annuities, especially the ones that won't payout until you attain age 85 or so, to exploit the mortality credits.

I have concerns with annuities in the following areas:
- expenses/costs
- longevity assumed in pricing
- concerns that current DB pensions may be sold to an annuity company that may put me at risk of exceeding state guarantee amounts for failed financial institution.

[sengsational]

Quote:

Originally Posted by gauss Has anyone done the calculation on what the equivalent discount rate is implied in delaying drawing SS until age 70?

I thought it was 8%.

[Totoro]

Quote:

Originally Posted by MBMiner Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet.

longinvest I would assume is referring to 'SPIAs realistically available'.

Quote:

Originally Posted by MBMiner Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound? Bruce

My view: since inflation is unknowable and highly variable it is nigh impossible to assess whether any SPIA without inflation adjustment will be a sound investment. You lock in the interest rate for the rest of your life, inflation can go anywhere. Especially with current offered rates.

Since a main function of a SPIA is to offer protection against longevity risk a non-COLA one loses much of its appeal: By the time the longevity materializes cumulative inflation could have gone virtually anywhere.

That said, a non-COLA SPIA is still a great deflation hedge, so if that's what you are going for in your portfolio it has a place.

[sengsational]

Quote:

Originally Posted by MBMiner Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet. Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound? Bruce

I think they understand realistic SPIA's! Yeah, I give the insurance company a penny, and they give me $100,000 per month...I'd take it. But how realistic is that? I think we must assume that all replies on this thread that are not interested in an SPIA are basing that on what is currently and realistically available.

If I don't have to put a portion of my portfolio into something that could get whacked by inflation, I'm not going to do it! A TIPS ladder would be better.

[Totoro]

Quote:

Originally Posted by sengsational I thought it was 8%.

Random google link explains it quite nicely:
Delayed Social Security Retirement Benefits as an Investment | Social Security Choices

It's age and sex dependent (longevity).

[nun]

Quote:

Originally Posted by karluk My expectation is, if people really considered all of the angles, there is generally an interest rate that is attractive enough to tempt them to annuitize some of their nest egg. OP's poll is trying to narrow down a little just where that tipping point is.

Exactly. Even with a COLA the underlying interest rate to support the annual inflation adjustment can be calculated, it's just an increasing annuity. So as my employer's pension has a COLA it bumps up the internal interest rate to 7% assuming a 3% annual COLA which is what it was last year. If I was to use 1970s inflation numbers like 10% for the COLA the interest rate would have to be 15%.

So would anyone turn down a single life annuity with a 7% internal rate of return given a 3% COLA?

[Totoro]

Quote:

Originally Posted by nun So would anyone turn down a single life annuity with a 7% internal rate of return given a 3% COLA?

I'd take it, but not for my full portfolio. (up to 1/3rd or so).

[clifp]

Quote:

Originally Posted by nun Exactly. Even with a COLA the underlying interest rate to support the annual inflation adjustment can be calculated, it's just an increasing annuity. So as my employer's pension has a COLA it bumps up the internal interest rate to 7% assuming a 3% annual COLA which is what it was last year. If I was to use 1970s inflation numbers like 10% for the COLA the interest rate would have to be 15%. So would anyone turn down a single life annuity with a 7% internal rate of return given a 3% COLA?

I voted for 6%, I am 55 so my life expectancy is 25 years which means I should be getting back ~4% just based on life expectancy. Another 6% interest rate means I'd be getting $10K a year for life on 100K investment.
Today I can only get $5550 from an annuity so there is very big gap.

I'd go lower if there was some type of COLA provision.

[karluk]

If OP is interested in pursuing it, the fact that lottery winners generally have a choice between annuitized annual payments and a lump sum allows one to construct another poll that would approach this issue from another angle. We could narrow down the point where most people consider a lump sum to be less valuable than a future income stream. That would give an implied interest rate that could be easily calculated, instead of forcing poll respondents to estimate how changes in the interest rate affect future cash flows. The poll would be something like

Quote:

You have won a $400 million lottery prize, consisting of 20 annual payments of $20 million each. How small would the lump sum option have to be in order for you to opt for $20 million per year over 20 years instead of the lump sum? $300 million lump sum $200 million lump sum $100 million lump sum $50 million lump sum $25 million lump sum $10 million lump sum $5 million lump sum $1 million lump sum less than $1 million lump sum

[nun]

Quote:

Originally Posted by Totoro I'd take it, but not for my full portfolio. (up to 1/3rd or so).

I can only use my employer's DC plan to buy in and that's about 20% of my portfolio. The pension, along with rental income, will cover my annual expenses.

[eta2020]

That depends on your age...I am talking about Fixed immediate annuity.

At 20 I will take 5% hands down and at 90 they will pay me maybe 20% I would not care about it.

Needless to say in current low rate environment I would not buy annuity.

[longinvest]

Quote:

Originally Posted by Totoro longinvest I would assume is referring to 'SPIAs realistically available'.

Yes.

Quote:

Originally Posted by Totoro Since a main function of a SPIA is to offer protection against longevity risk a non-COLA one loses much of its appeal: By the time the longevity materializes cumulative inflation could have gone virtually anywhere.

That's exactly it! If I was to pay for peace of mind in regards to longevity risk, I want to have peace of mind that the income will be sufficient and keeping up with inflation, in my old days.

A nominal SPIA protects the insurer against inflation, instead of the retiree. It's the wrong product for the retiree.

[nun]

Quote:

Originally Posted by clifp I voted for 6%, I am 55 so my life expectancy is 25 years......

You should look at the latest life expectancy tables.....you have at least 3 years longer to live.

[clifp]

Quote:

Originally Posted by nun You should look at the latest life expectancy tables.....you have at least 3 years longer to live.

Really I used social securities Actuarial table. Is there a better source?

[nun]

Quote:

Originally Posted by clifp Really I used social securities Actuarial table. Is there a better source?

Yes, since 2010 life expectancy has improved. The SSA has a calculator

Retirement & Survivors Benefits: Life Expectancy Calculator

[gauss]

Ok - I will vote for 5% based on the following back of the envelope calculations

- Totoro's link above shows an analysis where the IRR for delaying SS by one year for a male age 62 to 63 is 2.9% assuming life expectancy of 82 years.

- The 2.9% above would be a real rate of return due to SS being adjusted for inflation. I will adjust for an assumed inflation rate of 2% to get a nominal IRR of 4.9%

- The problem in this scenario is that I have not transferred the risk of much higher inflation to the annuity provider as I have with the SS alternative. I can somewhat offset this risk by remembering that I may not receive what I have currently accrued under SS due to changes (reductions) in future law.

Agreed that the ability to purchase truly inflation adjusted annuities is what is really needed for the individual.

-gauss